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Guide to the Markets
MARKET INSIGHTS
Europe | |3Q 2015 As of 30 June 2015
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2Global Market Insights Strategy Team
Americas Europe Asia
Dr. David P. Kelly, CFA
New York
Stephanie H. Flanders
London
Tai Hui
Hong Kong
Andrew D. Goldberg
New York
Manuel Arroyo Ozores, CFA
Madrid
Yoshinori Shigemi
Tokyo
Anastasia V. Amoroso, CFA
Houston
Tilmann Galler, CFA
Frankfurt
Grace Tam, CFA
Hong Kong
Julio C. Callegari
So Paulo
Lucia Gutierrez-Mellado
Madrid
Kerry Craig, CFA
Melbourne
James C. Liu, CFA
Chicago
Vincent Juvyns
Luxembourg
Ian Hui
Hong Kong
David M. Lebovitz
New York
Dr. David Stubbs
London
Akira Kunikyo
Tokyo
Gabriela D. Santos
New York
Maria Paola Toschi
Milan
Ben Luk
Hong Kong
Hannah J. Anderson
New York
Alexander W. Dryden
London
Anthony Tsoi, CFA
Hong Kong
Abigail B. Dwyer
New York
Nandini L. Ramakrishnan
London
Ainsley E. Woolridge
New York
For China, Australia, Vietnam and Canada distribution: Please note this communication is for intended recipients only. In Australia for wholesale clients use only and in
Canada for institutional clients use only. For further details, please refer to the full disclaimer. Unless otherwise stated, all data is as of 30 June 2015 or most recently available.
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3Page reference
38. Interest rates and equities
39. Japanese equities
40. Developed markets equity valuations by country
41. Emerging markets equity valuations by country
42. Emerging markets valuations and returns
43. Emerging markets: Dividends and valuations
44. Equity income
45. Annual returns and intra-year declines
Fixed income46. Fixed income sector returns
47. Fixed income market data
48. Central bank policy
49. Government interest rates
50. Fixed income interest rate risk
51. Liquidity and duration risks
52. Government bonds
53. Investment-grade bonds
54. US high yield bonds
55. European high yield bonds
56. Emerging markets debt
57. Emerging markets debt composition
Other assets and investor behaviour58. Asset class returns
59. Correlation of returns (EUR)
60. Asset volatility
61. Commodity returns
62. Commodities
63. Oil consumption and production
64. Life expectancy and pension shortfall
65. Consumer confidence and the stock market
66. Industry fund flows
67. US asset returns by holding period
68. Alternative asset class returns
69. Risk/return characteristics of alternatives
70. Alternative strategies
Europe economy4. Europe: GDP and inflation
5. Eurozone cyclical indicators
6. Eurozone recovery monitor
7. Eurozone credit conditions
8. European Central Bank (ECB) policies
9. Europe cash accounts
10. Europe corporate finances
11. UK economic indicators
Global economy12. Global Purchasing Managers Index (PMI) for manufacturing
13. Global and European inflation dynamics
14. Economic and monetary policy divergence
15. US dollar
16. US Federal Reserve policies
17. US: GDP and inflation
18. US employment
19. US cyclical indicators
20. US consumer finances
21. Japan: GDP and inflation
22. Japan: Abenomics and the economy
23. China: GDP, inflation and policy rate
24. China cyclical indicators
25. China financial dynamics
26. Emerging markets challenges
27. Emerging markets trade connections with developed markets
Equities28. World stock market returns
29. European sector returns
30. Bond and equity relative valuations
31. MSCI Europe Index at inflection points
32. MSCI Europe Index equity valuations
33. MSCI Europe earnings and profit margins
34. US S&P 500 at inflection points
35. US S&P 500 equity valuations
36. US S&P 500 earnings and profit margins
37. Bear markets
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4GTM Europe | 4
-1
0
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'99 '01 '03 '05 '07 '09 '11 '13-3
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-1
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'99 '01 '03 '05 '07 '09 '11 '13
Average since 1999
May 2015
Headline CPI*Core CPI
Europe: GDP and inflation
Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food, energy and tobacco. Guide to the Markets - Europe. Data as of 30 June 2015.
InflationEU28, change year on year
%
EU28, change quarter on quarterReal GDP
%
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Average
1Q15
0,3% 0,4%
Average since 1999
Real GDP 2,3% 0,3%1,6% 0,9%
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5GTM Europe |
-8
-4
0
4
8
12
0
4
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12
16
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15
'01 '03 '05 '07 '09 '11 '13-6
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70
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'08 '09 '10 '11 '12 '13 '14 '15
0,6
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0,8
0,9
1,0
1,1
1,2
'95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15
Retail sales growthNew auto registrations
Industrial production and money supplyGross fixed capital formation*
Eurozone cyclical indicators
Source: (Top left, top and bottom right) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom left) Eurostat, US Bureau of Economic Analysis, FactSet, J.P. Morgan Asset Management. *US data is nonresidential gross fixed capital formation, Eurozone data is overall gross fixed capital formation due to data availability. M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions. Guide to the Markets - Europe. Data as of 30 June 2015.
Rebased to 100 at March 2008
EU19, excluding motor vehicles, change year on year
EU19, change year on year, three-month moving average
EU19, millions of new passenger cars, seasonally adjusted%
Average: 0,89
May 2015: 0,78
% %
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M1 (y/y) lead by 12 monthsIndustrial production (y/y)
US*
Eurozone
5
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6GTM Europe |
708090
100110120130140
'07 '08 '09 '10 '11 '12 '13 '140
5
10
15
20
25
30
'07 '08 '09 '10 '11 '12 '13 '14
Economic sentimentManufacturing purchasing managers indices
Gross exportsUnemployment rate
Eurozone recovery monitor
Source: (Top left) Markit, J.P. Morgan Asset Management. (Bottom left and bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. (Top right) European Commission, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
Index level
Rebased to 100 at December 2007, two-quarter moving average
Index level
%
ItalyFranceGermany Greece
Spain
FranceGermany Greece
SpainItaly
SpainEurozoneFranceGermany GreeceItaly
FranceGermanyIreland
SpainItaly Portugal
60
70
80
90
100
110
120
'07 '08 '09 '10 '11 '12 '13 '14 '15
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25
35
45
55
65
'07 '08 '09 '10 '11 '12 '13 '14 '15
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7GTM Europe |
-20
-10
00
10
20
30
'09 '10 '11 '12 '13 '14 '15
-8
-6
-4
-2
0
2
4
-200
-150
-100
-50
0
50
100
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Stronger loan demand
2
3
4
5
6
7
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
Eurozone credit conditions
Credit demand and eurozone GDP growth
Corporate lending rates
Net % of banks reporting positive loan demand, GDP growth
Non-financial corporations, new business lending up to 1 million, 1-5 years
Consumer credit (lhs)Eurozone GDP growth y/y (rhs)
Housing loans (lhs)Overall corporate (lhs)
Weaker loan demand
% %
ItalySpainFranceGermany
%
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Bank loans to households and non-financial corporations billions, net lending flow, three-month moving average
7
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8GTM Europe |
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
31,720,0
46,0
11,538,5
-10,1-1,9
15,6
-9,2-15,0
-20
0
20
40
60
80
0
50
100
150
200
250
0
5
10
15
20
25
30
Fed BoE BoJ ECB
Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. (Top right) Bank of England (BoE), Bank of Japan (BoJ), Deutsche Bank, European Central Bank (ECB), US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) Bank of England, FactSet, IMF, MSCI, Standard & Poors, J.P. Morgan Asset Management. *QE period for Fed is September 2008 to October 2014, BoE is March 2009 to June 2012, ECB is from March 2015 to September 2016. QE period for BoJ is April 2013 to October 2015 and based on Deutsche Bank estimates, as are net issuance amounts over the QE period for Japan and eurozone. **All US data is for 2 years following initial policy announcement. US QE1 is from November 2008, US QE2 is from November 2010, US QE3 is from September 2012. Eurozone QE is from August 2014 to 30 June 2015. Japan QE is from April 2013 to 30 June 2015. US equities is the S&P 500, Eurozone equities is the MSCI EMU and Japan equities is the MSCI Japan. Guide to the Markets - Europe. Data as of 30 June 2015.
European Central Bank (ECB) policies
ECB balance sheet: Assets Central bank quantitative easing purchases
Changes in equities and exchange rates
trillions
Since policy announcements**
% %
Jan 2005 Jul 2012: 249%
Jul 2015 Sep 2016: est. 39%
Aug 2012 Jun 2015:-20%
% of debt outstanding % of net issuance over QE period*
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Equities
Exchange rate%
US QE1 US QE2 US QE3 Eurozone Japan
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9GTM Europe |
-1
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3
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5
-1.000
0
1.000
2.000
3.000
4.000
5.000
'00 '02 '04 '06 '08 '10 '12 '14
Inflation (y/y)
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Europe cash accounts
Source: (Left) ECB, J.P. Morgan Asset Management. (Right) Bloomberg, Eurostat, J.P. Morgan Asset Management. Blue marker points represent year on year inflation and illustrate how the value of income would have been eroded due to inflation. Guide to the Markets - Europe. Data as of 30 June 2015.
Euro area deposits Income generated by 100.000 investment in a one-year bank deposit trillions
Aug 2012: 3,3tn
May 2015:1,8tn
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2007: 4.580
Jun 2015:115
Income
%
9
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10
GTM Europe |
Total leverage
Source: (Top left) MSCI, Thomson Reuters Datastream, Worldscope, J.P. Morgan Asset Management. (Right and bottom left) MSCI, FactSet, J.P. Morgan Asset Management. *RoW denotes revenues coming from the world excluding Europe, Asia and the Americas. Guide to the Markets - Europe.Data as of 30 June 2015.
Europe corporate finances
MSCI Europe Index: Geographical sources of revenue
Interest coverage ratio (EBIT / net interest)
MSCI Europe, ratio of total debt to total equity, quarterly
MSCI Europe, quarterly
'97 '99 '01 '03 '05 '07 '09 '11 '13
180
200
220
240
260
280
300
320
340
1Q15:194%
Average: 260%
%
'97 '99 '01 '03 '05 '07 '09 '11 '131
2
3
4
5
6x 3Q15:
3,6x
Average: 3,1x
RoW*11%
Americas26%
Asia9%
Europe53%
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GTM Europe |
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14-4
-2
0
2
4
6
'05 '06 '07 '08 '09 '10 '11 '12 '13 '144,0
5,0
6,0
7,0
8,0
9,0
-50
-40
-30
-20
-10
0
10Unemployment rate and consumer confidenceReal GDP growth
Wage growthCurrent account
UK economic indicators
% of GDP Change year on year
Rebased to 100 at 1Q08
US
UKGermany
FranceJapan
Source: (Top left) OECD, J.P. Morgan Asset Management. (Bottom left) FactSet, ONS, J.P. Morgan Asset Management. (Top right) FactSet, GFK, ONS, J.P. Morgan Asset Management. (Bottom right) FactSet, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. Guide to the Markets - Europe. Data as of 30 June 2015.
Headline CPIReal wage growth
Nominal wage growth*
Current account balanceCurrent transfers
Investment income Trade balance
Consumer confidenceUnemployment rate
% %
%
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11
90
94
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102
106
110
'08 '09 '10 '11 '12 '13 '14 '15
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-6
-4
-2
0
2
4
'05 '07 '09 '11 '13
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12
50,6 51,5 51,6 51,9 52,8 52,9 52,9 53,1 52,4 51,9 52,2 52,6 52,4 52,5 52,2 52,2 51,8 51,5 51,7 51,9 51,8 51,0 51,2 51,2
50,3 51,4 51,1 51,3 51,6 52,7 54,0 53,2 53,0 53,4 52,2 51,8 51,8 50,7 50,3 50,6 50,1 50,6 51,0 51,0 52,2 52,0 52,2 52,5
49,7 49,7 49,8 49,1 48,4 47,0 49,3 49,7 52,1 51,2 49,6 48,2 47,8 46,9 48,8 48,5 48,4 47,5 49,2 47,6 48,8 48,0 49,4 50,7
50,7 51,8 51,1 51,7 52,7 54,3 56,5 54,8 53,7 54,1 52,3 52,0 52,4 51,4 49,9 51,4 49,5 51,2 50,9 51,1 52,8 52,1 51,1 51,9
50,4 51,3 50,8 50,7 51,4 53,3 53,1 52,3 52,4 54,0 53,2 52,6 51,9 49,8 50,7 49,0 49,0 48,4 49,9 51,9 53,3 53,8 54,8 54,1
49,8 51,1 50,7 50,9 48,6 50,8 52,2 52,5 52,8 52,7 52,9 54,6 53,9 52,8 52,6 52,6 54,7 53,8 54,7 54,2 54,3 54,2 55,8 54,5
51,0 52,0 52,7 54,9 52,4 53,5 52,8 52,9 55,5 56,1 55,0 55,3 55,4 57,3 55,7 56,6 56,2 56,9 55,1 57,5 56,8 55,8 57,1 54,6
54,6 58,4 56,9 56,4 57,8 57,2 56,5 55,9 55,3 57,2 56,6 56,8 54,9 53,0 51,5 53,4 53,3 52,7 52,9 53,9 54,3 51,8 51,9 51,4
53,7 53,1 52,8 51,8 54,7 55,0 53,7 57,1 55,5 55,4 56,4 57,3 55,8 57,9 57,5 55,9 54,8 53,9 53,9 55,1 55,7 54,1 54,0 53,6
50,7 52,2 52,5 54,2 55,1 55,2 56,6 55,5 53,9 49,4 49,9 51,5 50,5 52,2 51,7 52,4 52,0 52,0 52,2 51,6 50,3 49,9 50,9 50,1
48,5 49,4 49,9 50,2 49,7 50,5 50,8 50,4 50,6 49,3 48,8 48,7 49,1 50,2 49,3 49,1 48,7 50,2 50,7 49,6 46,2 46,0 45,9 46,5
49,2 49,4 49,4 51,8 49,4 48,8 48,0 48,5 48,3 48,5 48,9 49,1 51,0 51,0 50,4 50,3 51,7 48,9 47,6 49,7 48,1 48,9 47,6 48,7
50,1 48,5 49,6 49,6 51,3 50,7 51,4 52,5 51,3 51,3 51,4 51,5 53,0 52,4 51,0 51,6 53,3 54,5 52,9 51,2 52,1 51,3 52,6 51,3
47,7 50,1 50,2 50,9 50,8 50,5 49,5 48,5 48,0 48,1 49,4 50,7 51,7 50,2 50,2 50,4 50,0 49,6 49,7 50,7 49,6 48,9 49,2 49,4
47,2 47,5 49,7 50,2 50,4 50,8 50,9 49,8 50,4 50,2 49,5 48,4 49,3 50,3 48,8 48,7 49,0 49,9 51,1 51,1 49,2 48,8 47,8 46,1
48,6 50,0 52,0 53,0 53,4 55,2 55,5 54,7 52,7 52,3 52,4 54,0 55,8 56,1 53,3 52,0 51,4 50,0 51,7 52,1 51,0 49,2 49,3 46,3
Global Purchasing Managers Index (PMI) for manufacturing
Korea
Japan
Ireland
Eurozone
FranceGermany
ItalySpain
UK
US
Brazil
Russia
India
China
Taiwan
Global
Source: FactSet, Markit, J.P. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of the manufacturing sector by surveying output and employment intentions. For Global PMI, heatmap colours are based on PMI relative to global recent history; for countries, heatmap colours are based on PMI relative to all countries shown. Global PMI is a GDP-weighted calculation. Guide to the Markets - Europe. Data as of 30 June 2015.
Lowest relative to 50 PMI Highest relative to 50 PMI50
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GTM Europe |
1,5
2,0
2,5
3,0
3,5
4,0
-1
0
1
2
3
4
5
'90 '94 '98 '02 '06 '10 '14
Eurozone inflation and consumer confidence5-year/5-year inflation*
Source: (Top) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom left) Bloomberg, J.P. Morgan Asset Management. (Bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. *5-year/5-year inflation expectations is the market expectation for average inflation over 5 years beginning in 5 years time, derived from inflation swaps. **CPI is the Consumer Price Index. Guide to the Markets - Europe. Data as of 30 June 2015.
Global and European inflation dynamics
Long-term inflation expectations
CPI change year on year
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-2
0
2
4
6
-40-35-30-25-20-15-10-505
% CPI** lagged six months (y/y) Consumer confidence%
Developed economies inflation
%
Average Jan 1990 to Dec 2008: 2,3%Average Jan 2009 to Jun 2015: 1,4%
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EurozoneUS
13
Dec 13 Jun 14 Dec 14 Jun 15
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GTM Europe |
-0,1
0,5
1,0
1,5
2,0
2,5
3,0
'16 '17 '18'08 '09 '10 '11 '12 '13 '14
85
90
95
100
105
110
115
120
125
Economic and monetary policy divergence
Source: (Left) FactSet, French National Institute of Statistics and Economic Studies (INSEE), German Federal Statistical Office, Irish Central Statistics Office (CSO), Italian National Statistical Institute (ISTAT), Japanese Cabinet Office, National Statistical Service of Greece, Portuguese National Statistical Institute (INE), Spanish National Statistical Institute (INE), UK Office for National Statistics (ONS), US Bureau of Economic Analysis, J.P. Morgan Asset Management. (Right) Bloomberg, US Federal Reserve, J.P. Morgan Asset Management. Eurozone core is France and Germany and eurozone periphery is Greece, Italy, Ireland, Portugal and Spain. The market expectations for the path of interest rates is derived from the futures market. There is no active Japanese futures market, therefore no market expectations for the target policy rate. Guide to the Markets - Europe. Data as of 30 June 2015.
Nominal GDP growth Market expectations for target policy rateRebased to 100 at 1Q08
%
Eurozone core
Eurozone periphery
UK
US
UKEurozone
US
Japan
US Fed FOMC June 2015 forecasts midpoint
Dec 2016:1,05%
Dec 2017: 1,72%
Dec 2015: 0,73%
Dec 2016:1,37%
Dec 2015:0,30%
Dec 2015: 0,01%
Dec 2016: 0,08%
Dec 2017: 1,85%
Dec 2017: 0,30%
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GTM Europe |
-0,1
5,48,7
17,220,8 20,9 22,9
-3
4
11
18
25
Averagesince 1973 May 2015
US dollar index
70
80
90
100
110
120
130
'73 '77 '81 '85 '89 '93 '97 '01 '05 '09 '13
Swiss franc
British pound
Canadian dollar
Mexican peso Euro
Japanese yen
Chinese renminbi
-8
-6
-4
-2
0
2
4
'05 '07 '09 '11 '13
US dollar performance vs. selected currenciesCurrent account% of GDP
Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) BEA, ECB, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
US dollar
US dollar indexReal broad effective exchange rate (REER)
Last 12 months
%
1978-1985:+52,7%
1985-1988:-29,5%
2002-2011:-28,6%1995-2002:
+34,2%1973-1978:-21,8% 2011-2015:
+15,5%
1985: Plaza Accord
1987: Louvre Accord
%
EurozoneUS
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1988-1995:-7,1%
95,7 93,0
15
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16
GTM Europe |
0
1
2
3
4
5
'08 '09 '10 '11 '12 '13 '14 '15
Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14
Individual FOMC member forecasts for the federal funds rate
Source: (All charts) FactSet, US Federal Reserve, J.P. Morgan Asset Management. *New purchases are the stated purchases from the US Federal Reserve. Reinvested purchases are bonds purchased with the principal received from maturing bonds. Guide to the Markets - Europe. Data as of 30 June 2015.
US Federal Reserve policies
US Federal Reserve balance sheet: Assets
US Federal Reserve MBS purchases
$ trillions From the June 2015 meeting
$ billionsNew purchases*
Reinvested purchases*
$
2015 2016 2017 Longer run
$
US Treasuries
Other
Agency MBS
Forecast
% MidpointIndividual FOMC member forecasts
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0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
0
20
40
60
80
100
120
Mar 15
16
-
17
GTM Europe |
'64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14-3
0
3
6
9
12
15
Average since 1964
Average since 1999
May2015
Headline CPI*Core CPI
'99 '01 '03 '05 '07 '09 '11 '13-10
-8
-6
-4
-2
0
2
4
6
8
10
US: GDP and inflation
Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Right) BLS, FactSet, J.P. Morgan Asset Management. SAAR is seasonally adjusted annual rate. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 30 June 2015.
Real GDP InflationChange quarter on quarter, SAAR Change year on year
Average since 1999 1Q15
Real GDP%
%
Average
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Components of nominal GDP 1Q15Consumption 68,5%Government 17,9%Investment ex- housing 13,4%Housing 3,3%Net exports -3,2%
4,1% 2,3% 0,0%
4,1% 2,0% 1,7%
2,0% -0,2%
17
-
18
GTM Europe |
62
63
64
65
66
67
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
'07 '08 '09 '10 '11 '12 '13 '141,0
1,5
2,0
2,5
3,0
3,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Constructing the Reason-for-Nonparticipation Variable Using the Monthly CPS, 6 February 2014, Shigeru Fujita, Federal Reserve Bank of Philadelphia, J.P. Morgan Asset Management. (Bottom right) BLS, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
US employment
Unemployment rate Labour force participation rateSeasonally adjusted % of population aged 16+ working or looking for work
'64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '143
4
5
6
7
8
9
10
11
Jun 2015:5,3%
Average: 6,1%
%
Jun 2015: 62,6%
%
G
l
o
b
a
l
e
c
o
n
o
m
y
Wage growthChange year on year
Employment Cost Index
Average hourly earningsJun 2015:
2,0%
1Q15: 2,7%
% %
Disabled
Retired
Other
18
-
19
GTM Europe |
25
30
35
40
45
50
55
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
36
38
40
42
44
46
48
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
0
500
1,000
1,500
2,000
2,500
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
8
12
16
20
24
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
Manufacturing and trade inventoriesLight vehicle sales
Real capital goods orders*Housing starts
US cyclical indicators
Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top and bottom right and bottom left) FactSet, US Census Bureau, J.P. Morgan Asset Management. *Capital goods orders deflated using the producer price index for capital goods. SAAR is seasonally adjusted annual rate. Guide to the Markets - Europe. Data as of 30 June 2015.
Thousands, SAAR
Days of sales, seasonally adjusted
Non-defense capital goods orders ex-aircraft, $ billions, seasonally adjusted
Millions, SAAR
$
G
l
o
b
a
l
e
c
o
n
o
m
y
Average: 15,3
June 2015:17,1
Average: 1.342
May 2015:1.036
Apr 2015: 41,4
Average: 39,5 May 2015: 40,7
19
-
20
GTM Europe |
8
9
10
11
12
13
14
'80 '85 '90 '95 '00 '05 '10 '15
Home sales, prices and housing starts
Source: (Top and bottom left) FactSet, US Federal Reserve, J.P. Morgan Asset Management. (Right) FactSet, National Association of Realtors, US Census Bureau, J.P. Morgan Asset Management. Price index is the mean existing home sale price. SAAR is seasonally adjusted annual rate. *2Q15 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. Guide to the Markets - Europe. Data as of 30 June 2015.
US consumer finances
Household net worth
Household debt service ratio
$ billions, SAAR Rebased to 100 at December 1999
Debt payments as % of disposable personal income, seasonally adjusted
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
20.000
40.000
60.000
80.000
2Q15*:$85.7722Q07:
$67.858
% 4Q07: 13,2%
2Q15*:9,9%
'99 '01 '03 '05 '07 '09 '11 '1325
50
75
100
125
150
175
Price index
Existing home sales
Housing starts
$
+26,3%
+55,1%
+116,7%
G
l
o
b
a
l
e
c
o
n
o
m
y
20
-
21
GTM Europe |
-3
-2
-1
0
1
2
3
4
5
'99 '01 '03 '05 '07 '09 '11 '13-5
-4
-3
-2
-1
0
1
2
3
4
'99 '01 '03 '05 '07 '09 '11 '13
Average since 1999
May 2015
Headline CPI*Core CPI
CPI less food & consumption tax
Average since 1999
Real GDP
Japan: GDP and inflation
Source: (Left) FactSet, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Bloomberg, Japan Ministry of Internal Affairs & Communications, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 30 June 2015.
Real GDP growth InflationChange quarter on quarter Change year on year
%%
Average
G
l
o
b
a
l
e
c
o
n
o
m
y
0,2% 1,0%
1Q15
21
0,0% 0,5%
-0,3% 0,4%-0,1% 0,0%
-
22
GTM Europe |
58
59
60
61
62
63
64
65
'80 '85 '90 '95 '00 '05 '10 '15
Current OECD avg.
AllFemale
Japanese yen and the stock market
Source: (Top left) FactSet, Japan Ministry of Internal Affairs & Communications, Japan Ministry of Health, Labour and Welfare, J.P. Morgan Asset Management. (Bottom left) OECD, Statistics Bureau of Japan, J.P. Morgan Asset Management. (Right) FactSet, Nikkei, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 30 June 2015.
Japan: Abenomics and the economy
Labour force participation rate
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '146.000
8.000
10.000
12.000
14.000
16.000
18.000
20.000
22.000
70
80
90
100
110
120
130
Nikkei 225 Index per $
Change over last 12 months per $ -17,2%Nikkei 225 33,5%
G
l
o
b
a
l
e
c
o
n
o
m
y
Japanese wage growthChange year on year, three-month moving average
'03 '05 '07 '09 '11 '13
-2
-1
0
1
2
3%
Wage growthCore inflation*
12-month moving average
%
May 2015:59,4%
59,4% 74,2%49,4% 65,1%
22
-
23
GTM Europe |
0
5
10
15
20
25
0
1
2
3
4
5
'04 '06 '08 '10 '12 '14-6
-3
0
3
6
9
12
15
18
21
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Source: (Left and top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) FactSet, Peoples Bank of China (PBoC), J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 30 June 2015.
China: GDP, inflation and policy rate
Nominal GDP growthChange year on year
Consumption
GDP growthInvestment
Net exports
%
G
l
o
b
a
l
e
c
o
n
o
m
y
%
Policy rate on one-year renminbi depositsPolicy rate and reserve ratio requirement (RRR)
PBoC policy rate RRR %
InflationChange year on year
'00 '02 '04 '06 '08 '10 '12 '14-6
0
6
12
18
24
May 2015Food CPI 1,6%Headline CPI* 1,2%Core CPI 1,6%%
1Q15:7,0%
23
-
24
GTM Europe |
0
5
10
15
20
25
-2
-1
0
1
2
'11 '12 '13 '14 '15
-10
10
30
50
70
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Top 100 cities property prices and housing inventory Merchandise trade growth
Fixed asset investment Retail and auto sales
China cyclical indicators
Source: (All charts) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. Tier 1 cities include Beijing, Shanghai, Guangzhou and Shenzhen. Tier 2 cities include 31 provincial capital cities and municipalities not included in Tier 1 cities, and Tier 3 cities include the other 65 cities in the Soufunsurvey. Guide to the Markets - Europe. Data as of 30 June 2015.
Change year on year, three-month moving average
Change month on month, number of months
Change year on year, three-month moving average
Change year on year, three-month moving average
'11 '12 '13 '14 '15-20
0
20
40
Exports
Imports
%
Auto sales
Retail sales
Manufacturing
Real estate
Infrastructure
G
l
o
b
a
l
e
c
o
n
o
m
y
%
%
mths
Property prices
'06 '07 '08 '09 '10 '11 '12 '13 '14 '158
12
16
20
24
0
20
40
60% %
24
2nd tier cities 3rd tier cities
1st tier cities
-
25
GTM Europe |
0
10
20
30
40
50
'00 '02 '04 '06 '08 '10 '12 '14
050
100150200250300350
40
60
80
100
120
140
'77 '81 '85 '89 '93 '97 '01 '05 '09 '13
2014 public, household and non-financial corporate debtPrivate non-financial debt
Foreign exchange reservesCredit to private sector
China financial dynamics
Source: (Top left) BIS, CEIC, Lombard Street Research, J.P. Morgan Asset Management. (Bottom left) World Bank, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook April 2015, Lombard Street Research, J.P. Morgan Asset Management. (Bottom right) Bloomberg, FactSet, Oxford Economics, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
% of GDP
% of GDP
% of GDP
% of GDP, quarters since the start of debt rise
2013: 140%
%
Non-financial corporate debtPublic debt
Household debt%
%
%
China starting in 1998
Japan starting in 1965
Japan UK US Eurozone China KoreaGl
o
b
a
l
e
c
o
n
o
m
y
25
80
130
180
230
1 27 53 79 105 131
-
26
GTM Europe |
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top right) MSCI, US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, J.P. Morgan Asset Management. *REER is real effective exchange rate. Guide to the Markets - Europe. Data as of 30 June 2015.
Emerging markets challenges
Consensus growth forecasts EM equity performance and US rate hikes
Relative EM / DM equity performance and USD REER*
Estimates for next 12 months MSCI EM Index in USD, rebased to 100 on the date of first rate hike
Equity performance rebased to 100 at 1993
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '130
50
100
150
200
250 90
100
110
120
130
USD REER (inverted)
MSCI EM / MSCI DM
%
50
75
100
125
150
-250 -125 0 125 250
4 Apr 199430 Jun 199930 Jun 2004
Thailand
China
Russia
Turkey
Brazil
India
Indonesia
G
l
o
b
a
l
e
c
o
n
o
m
y
Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15
26
Days
-
27
GTM Europe |
0,0 0,2 0,4 0,6 0,8 1,0 1,2
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
Emerging markets trade connections with developed markets
Source: (Left) IMF, World Trade Organisation, J.P. Morgan Asset Management. (Right) FactSet, IMF, J.P. Morgan Asset Management. *Assumes a 1% increase in GDP growth from Japan, Europe and the US, and estimates a reaction function through a multistage regression measuring emerging market economies sensitivity to export volumes. Developed market imports are used as a proxy for developed demand and estimated from a 1% pick up in domestic GDP. The sample period tested ranges between 1993 and 2014 reflecting quarterly data. Guide to the Markets - Europe. Data as of 30 June 2015.
EM exports breakdown EM GDP growth: Sensitivity to DM growth*Estimated increase in real GDP growth from a 1% increase in DM growth
G
l
o
b
a
l
e
c
o
n
o
m
y
Europe
USJapan
C
o
m
m
o
d
i
t
y
E
x
p
o
r
t
e
r
s
M
a
n
u
f
a
c
t
u
r
e
r
s
Asian countries
EMEA countries
Commodity exports as % of merchandise exports - 2013
M
a
n
u
f
a
c
t
u
r
i
n
g
e
x
p
o
r
t
s
a
s
%
o
f
m
e
r
c
h
a
n
d
i
s
e
e
x
p
o
r
t
s
-
2
0
1
3
LatAm countries
If the US economy expands by 1%, then the Mexican economy is estimated to grow by an additional0,3%, other things equal.
Chile
S. Africa
Russia
Colombia
Brazil
Mexico
Taiwan
Turkey
Korea
Thailand
27
ChinaCzech
RepublicKoreaHungary
PolandMexicoThailand
IndiaUkraine
Malaysia
PhilippinesTurkey
Taiwan
Vietnam
S. AfricaIndonesiaBrazil
Argentina
RussiaColombia
ChilePeru
NigeriaVenezuela
%
-
28
55,0% MSCI EM
35,8%
20,2% Europe 19,6%
26,7% Asia ex-Jp
38,0%
-23,0% TOPIX -40,6%
73,4% MSCI EM
62,8%
35,4% Small Caps
24,4%
5,5% US S&P 500
2,1%
20,8% Asia ex-Jp
19,7%
27,2% Small Caps
35,8%
29,5% US S&P 500
13,7%
24,5% TOPIX 17,0%
-0,0% TOPIX 5,8%
11,0% Asia ex-Jp
10,0%
45,3% TOPIX 45,2%
19,6% Asia ex-Jp
28,6%
26,1% MSCI EM
33,6%
-33,7% US S&P 500
-37,0%
67,2% Asia ex-Jp
67,2%
28,3% Asia ex-Jp
15,6%
3,5% HDY Equity
1,5%
18,1% Europe 16,4%
26,7% US S&P 500
32,4%
19,7% Asia ex-Jp
7,7%
15,3% Small Caps
7,7%
-2,1% Small Caps
0,8%
10,1% MSCI EM
10,3%
41,9% Asia ex-Jp
24,1%
18,6% MSCI EM
28,8%
4,6% Portfolio
11,1%
-37,9% HDY Equity
-34,4%
40,2% Small Caps
40,8%
27,5% MSCI EM
14,4%
-5,7% Small Caps
-8,7%
16,8% MSCI EM
17,4%
21,5% TOPIX 54,4%
16,5% Small Caps
6,7%
14,7% Asia ex-Jp
6,3%
-2,8% Portfolio
-0,4%
9,3% Small Caps
8,2%
33,8% Small Caps
23,3%
16,0% HDY Equity
21,6%
3,2% Europe 6,5%
-38,6% Small Caps
-40,4%
37,6% Portfolio
35,8%
23,9% TOPIX 1,0%
-5,8% Portfolio
-7,5%
16,3% Small Caps
18,4%
20,5% Europe 22,3%
16,2% HDY Equity
8,7%
13,3% Portfolio
6,3%
-2,8% MSCI EM
0,8%
8,9% US S&P 500
7,7%
33,6% Portfolio
23,9%
12,5% Portfolio
19,4%
-1,0% HDY Equity
4,7%
-40,3% Portfolio -40,1%
34,0% HDY Equity
30,2%
23,1% US S&P 500
15,1%
-7,5% Europe -8,8%
15,6% Portfolio
17,1%
15,3% Portfolio
23,6%
15,3% Portfolio
8,2%
13,3% Europe 7,7%
-3,0% Europe -3,6%
8,5% Portfolio
8,0%
27,0% HDY Equity
17,7%
5,2% Small Caps
13,6%
-4,9% US S&P 500
5,5%
-43,3% Europe -38,5%
32,5% Europe 28,6%
20,9% Portfolio
11,1%
-9,6% TOPIX
-17,0%
14,2% US S&P 500
16,0%
13,9% HDY Equity
20,5%
11,8% MSCI EM
5,6%
12,0% MSCI EM
5,8%
-3,0% Asia ex-Jp
0,8%
8,2% HDY Equity
7,7%
26,7% Europe 25,5%
3,6% US S&P 500
15,8%
-8,8% Small Caps
-3,8%
-49,8% Asia ex-Jp
-47,7%
22,5% US S&P 500
26,5%
16,2% HDY Equity
8,0%
-14,3% Asia ex-Jp
-14,6%
13,6% HDY Equity
14,0%
-1,1% Asia ex-Jp
6,2%
10,1% TOPIX 10,3%
9,9% US S&P 500
1,2%
-3,3% US S&P 500
0,3%
6,4% Europe 6,4%
20,9% US S&P 500
4,9%
-8,7% TOPIX 3,0%
-14,5% TOPIX -11,1%
-50,8% MSCI EM
-45,7%
1,5% TOPIX 7,6%
11,7% Europe 7,5%
-15,4% MSCI EM
-12,5%
5,9% TOPIX 20,9%
-6,5% MSCI EM
3,8%
7,4% Europe
5,2%
8,7% HDY Equity
1,5%
-3,8% HDY Equity
-2,0%
3,5% TOPIX 3,9%
World stock market returns
Local
Source: MSCI, TOPIX, Standard & Poors, FactSet, J.P. Morgan Asset Management. Annualised return covers the period 2005 to 2014. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI Europe Small Cap Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 30% Europe; 20% S&P 500; 15% EM; 10% Asia ex-Japan; 10% TOPIX; 10% HDY equity and 5% small cap. All indices are total return.Guide to the Markets - Europe. Data as of 30 June 2015.
E
q
u
i
t
i
e
s
20102005 20072006 20122008 2011 2Q152009 2013 2014 YTDTen-yrAnn.
GTM Europe | 28
-
29
European sector returns
MSCI Europe Index
Source: FactSet, MSCI, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. *Since market peak represents period 9 October 2007 to end of latest quarter. Since market low represents period 9 March 2009 to end of latest quarter. **Correlation to interest rates is calculated using daily sector returns and daily 10-year German Bund yield over the last 10 years. Guide to the Markets - Europe. Data as of 30 June 2015.
Europe weight
2Q15
YTD
Since market peak*
Since market low*
Forward P/E ratio
15-year average
Trailing P/E ratio
15-year average
Dividend yield
15-year average
Growth weight
Value weight
Beta to Europe
Correl to int. rates**
Financials Health care
Cons. staples
Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe
E
q
u
i
t
i
e
s
GTM Europe | 29
23,1% 13,6% 13,5% 11,8% 11,0% 7,5% 7,1% 5,0% 3,9% 3,4% 100%
11,7% 17,9% 20,9% 17,5% 13,6% 6,6% 1,7% 3,2% 0,1% 6,7% 100%
34,6% 9,1% 6,1% 5,9% 8,4% 8,6% 12,8% 6,7% 7,8% 0,1% 100%
-2,8 -5,1 -3,7 -3,5 -5,3 -4,4 -2,6 1,2 -2,3 -5,9 -3,6
9,2 8,1 5,9 14,2 8,6 6,4 0,2 11,3 -1,7 7,9 7,7
-27,9 109,6 87,5 75,7 22,5 -0,8 7,2 55,5 -7,3 4,7 20,5
206,8 200,8 174,2 288,4 187,3 135,1 47,2 133,6 63,1 164,7 158,3
1,34x 0,62x 0,63x 0,95x 1,14x 1,31x 1,00x 0,78x 0,86x 0,99x 1,00x
0,43 0,26 0,29 0,36 0,40 0,37 0,34 0,33 0,33 0,33 0,41
11,8x 18,2x 19,2x 14,9x 15,9x 16,8x 14,4x 20,0x 14,5x 18,7x 15,1x
11,1x 16,2x 16,0x 14,6x 14,2x 12,3x 11,9x 18,6x 13,8x 21,7x 13,5x
13,7x 19,4x 20,8x 17,2x 18,0x 17,9x 13,3x 21,3x 15,0x 22,2x 16,7x
12,9x 17,5x 17,3x 17,2x 16,4x 14,1x 12,1x 21,0x 14,5x 22,6x 15,1x
3,6% 2,6% 2,8% 2,4% 2,6% 3,0% 5,4% 4,0% 4,4% 1,6% 3,2%
3,7% 2,6% 2,7% 2,8% 2,7% 2,9% 3,9% 4,3% 4,7% 1,7% 3,2%
W
e
i
g
h
t
s
R
e
t
u
r
n
P
/
E
D
i
v
-
30
GTM Europe |
0500
1.0001.5002.0002.5003.0003.5004.000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
0
500
1.000
1.500
2.000
2.500
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Equity risk premium*
Source: (All charts) FactSet, Standard & Poors, Tullett Prebon, J.P. Morgan Asset Management. *The equity risk premium is the S&P 500 forward earnings yield less the US Treasury 10-year yield. Guide to the Markets - Europe. Data as of 30 June 2015.
Bond and equity relative valuations
Histogram: S&P 500 earnings yield (inverse of P/E)
Histogram: Nominal 10-year Treasury yield
Number of days: 1965 2015
Number of days: 1965 2015
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13-4
-2
0
2
4
6
8 Equitie
s relatively
less e
xpensive
Equitie
s relatively
more
exp
ensive
Average: 1,8%
% 30 Jun 2015: 5,00%(lower than 73% of days since 1965)
30 Jun 2015: 2,35%(lower than 96% of days since 1965)
E
q
u
i
t
i
e
s
30
-
31
GTM Europe |
600
1.000
1.400
1.800
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
MSCI Europe Index at inflection points
Source: FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 30 June 2015.
MSCI Europe Index
16 Jul 2007: P/E = 13,0x
1.641
12 Mar 2003: P/E = 11,9x
676
4 Sep 2000: P/E = 21,8x
1.623
9 Mar 2009:P/E = 8,3x
714
-55%+180%
-54%
Total return:+133%
31 Dec 1996: P/E = 16,3x
714
Characteristic Sep 2000 Jul 2007 Jun 2015Index levelP/E ratio (fwd)Dividend yieldEuro 10 year
1.623 1.641 1.45521,8x 13,0x 15,1x1,8% 2,8% 3,3%5,2% 4,6% 0,8%
E
q
u
i
t
i
e
s
31
+158%
30 Jun 2015:P/E = 15,1x
1.455
-
32
GTM Europe |
0
2
4
6
8
10
12
'00 '02 '04 '06 '08 '10 '12 '14
'01 '03 '05 '07 '09 '11 '138
12
16
20
24
Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. Guide to the Markets - Europe.Data as of 30 June 2015.
MSCI Europe Index equity valuations
Forward P/E ratio
MSCI Europe cyclically adjusted P/E ratio
30 Jun 2015:15,1x
Average: 13,9x
Earnings yield and 10-year bond yield
Earnings yield(inverse of forward P/E)
30 Jun 2015: 0,8%
10-year European bond yield
%
30 Jun 2015:6,6%
x
Adjusted using trailing 10-year average inflation-adjusted earnings
0
10
20
30
40
'79 '84 '89 '94 '99 '04 '09 '14
Average: 17,8x
30 Apr 2015:16,0x
x
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32
-
33
GTM Europe |
'13'14 '15
'16
95
105
115
125
135
145
'11 '12 '13 '14
Source: (Left) FactSet, MSCI, J.P. Morgan Asset Management. (Top right) FactSet, MSCI, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, Standard & Poors, J.P. Morgan Asset Management. *Data is last 12 months. Guide to the Markets - Europe. Data as of 30 June 2015.
MSCI Europe earnings and profit margins
MSCI Europe earnings and performance MSCI Europe annual earnings estimates
US and European operating profit margins
Index level, analyst estimates of the next 12 months of earnings Monthly earnings per share consensus estimates
Earnings per share/sales per share for MSCI Europe and S&P 500*
'07 '08 '09 '10 '11 '12 '13 '145,5
6,0
6,5
7,0
7,5
8,0
8,5
9,0
9,5
10,0
10,5
700
800
900
1.000
1.100
1.200
1.300
1.400
1.500
1.600
MSCI Europe index levelMSCI Europe profits
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '146
7
8
9
10
11
US
Europe
%
$
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33
-
34
GTM Europe |
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
US S&P 500 at inflection points
Source: FactSet, Standard & Poors, Tullett Prebon, J.P. Morgan Asset Management. The P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 30 June 2015.
S&P 500 Index
24 Mar 2000:P/E = 27,2x
1.527
9 Oct 2002:P/E = 14,1x
777
9 Oct 2007:P/E = 15,7x
1.565
9 Mar 2009:P/E = 10,3x
677
31 Dec 1996:P/E = 16,0x
741
-47%-55%
+121%Total return:
+116%
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Characteristic Mar 2000 Oct 2007 Jun 2015Index levelP/E ratio (fwd)Dividend yieldUS 10 year
34
+248%
1.527 1.565 2.06327,2x 15,7x 16,4x1,1% 1,7% 1,9%6,2% 4,6% 2,4%
30 Jun 2015:P/E = 16,4x
2.063
-
35
GTM Europe |
Source: (Left) FactSet, IBES, Moodys, Standard & Poors, J.P. Morgan Asset Management. (Top right) FactSet, Standard & Poors, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. (Bottom right) FactSet, Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
US S&P 500 equity valuations
Earnings yield and Baa corporate bond yield Forward P/E ratio
S&P 500 Shiller cyclically adjusted P/EAdjusted using trailing 10-year average inflation-adjusted earnings
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '133
4
5
6
7
8
9
10
11
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
12
16
20
24
28
'00 '10 '20 '30 '40 '50 '60 '70 '80 '90 '00 '100
10
20
30
40
50
%
Average: 16,3x
31 Dec 1999: 25,4x
30 Jun 2015:16,4x
30 Jun 2015:26,7x
Average:16,6x
x
x
Baa corporate bond yield
Earnings yield (inverse of forward P/E)
30 Jun 2015:6,1%
30 Jun 2015: 5,2%
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-
36
GTM Europe |
-5,0
9,112,0
1,1
-6
-3
0
3
6
9
12
15
Source: (Left and top right) FactSet, Standard & Poors, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. Exporters is defined as the 40% of the S&P 500 with the highest percentage of overseas revenues and domestic companies are the remaining 60% of the S&P 500. Guide to the Markets - Europe. Data as of 30 June 2015.
US S&P 500 earnings and profit margins
S&P 500 earnings and performance S&P 500 earnings per share growth
Employee compensation and profitability
Index level, analyst estimates of the next 12 months of earnings Change year on year, 1Q15
% of GDP
'07 '08 '09 '10 '11 '12 '13 '1460
70
80
90
100
110
120
130
600
800
1.000
1.200
1.400
1.600
1.800
2.000S&P 500 index levelS&P 500 profits
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '1550
52
54
56
58
60
2
4
6
8
10
12Corporate profitsEmployee compensation %%
$%
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s Total index Ex-energyDomestic
companies Exporters
36
-
37
GTM Europe |Bear markets
Source: FactSet, NBER, Robert Shiller, Standard & Poors, J.P. Morgan Asset Management. *A bear market represents a 20% or more decline from the previous market high using a monthly frequency. Periods of Recession are defined using NBER business cycle dates. Commodity spike is defined as significant rapid upward moves in oil prices. Periods of Extreme valuations are those where S&P 500 last twelve months P/E levels were approximately two standard deviations above long run averages. Aggressive Fed Tightening is defined as Federal Reserve monetary tightening that was unexpected and significant in magnitude.Guide to the Markets - Europe. Data as of 30 June 2015.
Characteristics of past bear markets*
S&P 500 declines from all-time highs
Recession
20% market decline
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Market corrections Cycle peakBull market
duration(months)
Decline from all-time high Recession
Commodity spike
Aggressive Fed tightening
Extreme valuations Commentary
1 Crash of 1929 Aug 1929 37 -84% Excessive leverage, irrational exuberance2 1937 Fed Tightening Feb 1937 22 -74% Premature monetary tightening3 Post WWII Crash May 1946 48 -54% Post-war demobilisation, recession fears4 Flash Crash of 1962 Dec 1961 14 -22% Flash crash, Cuban Missile Crisis5 Tech Crash of 1970 Dec 1968 73 -29% Economic overheating, civil unrest6 Stagflation Dec 1972 29 -43% OPEC oil embargo7 Volcker Tightening Nov 1980 31 -19% Extremely high rates to rein in inflation8 1987 Crash Aug 1987 59 -27% Program trading, overheated market9 Tech Bubble Aug 2000 118 -42% Extreme valuations, mostly in tech stocks10 Global Financial Crisis Oct 2007 55 -51% Leverage, housing, Lehman collapse
%
37
-
38
GTM Europe |
-0,8
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
0 2 4 6 8 10 12 14 16
Interest rates and equities
Source: FactSet, MSCI, Standard & Poors, US Treasury, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. The initial reaction represents the period during which, in our judgment, markets began pricing the first rate hike through the date of the second rate hike. The subsequent market reaction is the period from the second rate hike to a point determined to be the end of the rate hiking cycle. The total reaction is the market movement across the full rate hiking cycle. Guide to the Markets - Europe. Data as of 30 June 2015.
Correlations between weekly equity returns and interest rate movementsRolling two-year correlation of weekly returns of the S&P 500, MSCI Europe Index and the 10-year Treasury yield, 1980 - 2015
Positive relationship between yield movements and equity returns
Negative relationship between yield movements and equity returns
S&P 500MSCI Europe
C
o
r
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Market reaction when the US Fed raised rates
S&P 500 price return 87 87-89 94-95 99-00 04-06
Initial reaction -5% -7% -10% -7% -8%
Subsequent market reaction
32% 24% 7% 18% 20%
Total reaction 26% 17% -2% 10% 11%
%10-year Treasury yield
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-
39
GTM Europe |
43%
13%
20%
20%
4%
0
5
10
15
20
25
30
35
'00 '02 '04 '06 '08 '10 '12 '14
44
27 2521 20 18
15
0
10
20
30
40
50
-0,8-0,6-0,4-0,20,00,20,40,6
'00 '02 '04 '06 '08 '10 '12 '14
35%
15%25%
25%
Earnings revisions, three-month moving averageJapanese pension fund asset allocation**Equities earnings momentum
Japanese equities
JapanEuropeUS%
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Listed companies' cash and cash equivalents holdings*% of market capitalisation, average between 2004 and 2012
TOPIX dividends per share 30 Jun 2015: 30,2
Latest allocation
(Dec 2014)
Target allocation
Source: (Top left) FactSet, Standard & Poors, STOXX, TOPIX, J.P. Morgan Asset Management. (Bottom left) IMF, J.P. Morgan Asset Management. (Top right) FactSet, Government Pension Investment Fund, Japanese Cabinet Office, Japan Investment Trust Association, Pension Fund Association, J.P. Morgan Asset Management. (Bottom right) FactSet, TOPIX, J.P. Morgan Asset Management. *Cash and cash equivalent holdings derived from "Unstash the Cash! Corporate Governance Reform in Japan, Chie Aoyagi and Giovanni Ganelli, IMF, August 2014. **The Japanese Government Pension Investment Fund (GPIF) has JPY 137 trillion of assets under management as of 31 December 2014. Guide to the Markets - Europe. Data as of 30 June 2015.
Domestic bondsInternational bondsDomestic stocksInternational stocksShort-term assets
%
GermanyJapan Italy France UK US Canada
39
-
40
GTM Europe |Developed markets equity valuations by country
Source: FactSet, MSCI, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - Europe. Data as of 30 June 2015.
Developed markets
Expensive relative to
own history
Expensive relative to
world
Cheap relative to own history
Cheap relative to
world
How to interpret this chart
Average
Current
+3 Std dev
+2 Std dev
+1 Std devAverage
-1 Std dev-2 Std dev
-3 Std dev
+5 Std dev
+4 Std dev
-4 Std dev
+6 Std dev
-5 Std dev
S
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Spain Italy UK Germany France ACWI Japan USSwitzerlandDM Index
Current composite index
Current 10-year averageForward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield
Spain -1,47 14,3x 1,4x 7,2x 4,6% 11,3x 1,5x 4,4x 5,1%Italy -1,46 15,1 1,1 5,2 3,0 11,4 1,1 3,6 3,5UK -0,33 15,1 1,8 9,3 4,0 11,8 1,9 7,1 3,7Germany -0,30 13,5 1,7 8,7 2,8 11,7 1,7 5,5 2,9France -0,21 15,4 1,6 9,1 3,2 11,8 1,5 6,0 3,3ACWI 0,85 15,5 2,1 10,2 2,5 13,4 2,1 7,4 2,5Japan 0,89 15,4 1,5 8,7 1,7 16,3 1,4 6,5 1,8DM Index 1,16 16,1 2,2 10,6 2,4 13,7 2,1 7,5 2,5Switzerland 1,88 16,9 2,5 14,2 3,2 14,1 2,6 10,3 3,1US 2,40 16,7 2,8 11,6 2,0 14,3 2,7 8,8 1,9
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41
GTM Europe |Emerging markets equity valuations by country
Source: FactSet, MSCI, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - Europe. Data as of 30 June 2015.
Emerging markets
Current composite index
Current 10-year averageForward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield
Russia -4,75 5,3x 0,5x 3,0x 4,9% 7,2x 1,2x 6,2x 2,9%Brazil -1,94 12,7 1,2 6,4 4,1 10,3 1,9 5,9 3,4China -1,21 10,6 1,5 7,9 2,8 11,8 2,1 4,5 2,8EM Index -1,15 11,7 1,5 7,2 2,7 11,3 1,9 6,2 2,7Taiwan -1,02 12,4 1,8 7,6 3,3 14,5 1,9 6,4 3,7Korea -0,96 9,5 1,0 4,9 1,5 9,7 1,4 5,5 1,6ACWI 0,85 15,5 2,1 10,2 2,5 13,4 2,1 7,4 2,5S. Africa 1,31 16,1 2,6 11,5 2,9 12,3 2,6 8,9 3,2Mexico 3,04 18,7 2,7 10,2 1,5 15,3 2,9 6,5 1,9India 3,81 18,2 3,1 12,0 1,5 16,0 3,2 12,5 1,3
Russia Brazil China EM Index Taiwan S. Korea ACWI S. Africa IndiaMexico
Expensive relative to
own history
Cheap relative to own history
Average
Current
Expensive relative to
world
Cheap relative to
world
How to interpret this chart
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+3 Std dev+2 Std dev
+1 Std devAverage
-1 Std dev-2 Std dev-3 Std dev
+5 Std dev+4 Std dev
-4 Std dev
+6 Std dev
-5 Std dev-6 Std dev
41
-
42
GTM Europe |
0,75
1,00
1,25
1,50
1,75
2,00
2,25
2,50
2,75
3,00
'95 '97 '99 '01 '03 '05 '07 '09 '11 '13-60
-40
-20
0
20
40
60
80
0,75 1,00 1,25 1,50 1,75 2,00 2,25 2,50 2,75 3,00 3,25
Emerging markets valuations and returns
Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. Linear regression of price to book ratios on next 12 months price return from September 1995 through June 2015. Guide to the Markets - Europe. Data as of 30 June 2015.
MSCI Emerging Markets Index: Price to book MSCI Emerging Markets Index: Price to book and returnsPrice to book ratio and next 12 months price return
Average:
30 Jun 2015:
-2,0 std. dev.
+2,0 std. dev.
x Current level%
1,80x
1,59x
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42
x
-
43
GTM Europe |
485
314 303
86
0
200
400
600
'95 '97 '99 '01 '03 '05 '07 '09 '11 '130
50
100
150
200
250
300
350
400
450
500
80
90
100
110
120
130
'00 '02 '04 '06 '08 '10 '12 '14
Source: (Left) FactSet, IBES, MSCI, J.P. Morgan Asset Management. (Top and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 30 June 2015.
Emerging markets: Dividends and valuations
MSCI EM Index: Long-term growth in dividends per share (DPS) and earnings per share (EPS)
Relative valuation of high dividend yielding equities
Number of companies yielding greater than 2% by region
Rebased to 100 at December 1995Valuation vs. long-term average, three-month moving average
Constituents of the MSCI All Country World Index
EuropeUS
Emerging markets
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EM EPS (fwd)
DM EPS (fwd)DM DPS
EM DPS
Emerging markets
US Europe Japan
43
-
44
GTM Europe |
0,10,8
1,42,5
3,0 3,24,0
6,2 6,2
0
2
4
6
8
MSCI Europe'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
50
100
150
200
250
Sources of incomeMSCI Europe indices: Price vs. total return*Rebased to 100 at December 1999
Source: (Top) Ibbotson, Standard & Poors, J.P. Morgan Asset Management. (Bottom left) FactSet, FTSE, J.P. Morgan Asset Management. High dividend yield is the FTSE 350 Higher Yield Index. (Bottom right) Barclays, BofA/Merrill Lynch, FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. Euro corporate: Barclays Euro Aggregate Credit - Corporate; EM debt: J.P. Morgan EMBI Global; High yield: BofA/Merrill Lynch Developed Markets High Yield Constrained; Global REITs: FTSE NAREIT Index; Converts: Barclays Global Convertibles; EM equity; MSCI EM. Yields for the bond indices are yield to worst and dividend yields for the equity indices. *Returns in local currency. Guide to the Markets - Europe. Data as of 30 June 2015.
Equity income
S&P 500 total return index: Dividends and capital appreciationAverage annualised returns
High dividend yield total returnTotal returnPrice return
+125%
+58%
-4%
4,7% 5,4% 6,0% 5,1% 3,3% 4,2% 4,4% 2,5%1,8%
2,7% 4,0%
13,9%
-5,3%
3,0%13,6%
4,4%1,6%
12,6% 15,3%
-2,7%
16,6%5,9%
-10-505
10152025
1926-1929 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010-2014 1926-2014
%
%
Cash Bunds ConvertsEurocorp
Highyield
Global REITs
EMequity
EMDebt
Eurozone average CPI inflation: 0,1% (12 months to May 2015)
DividendsCapital appreciation
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-
45
GTM Europe |
13
2
15
34
16
39
21
-18
22
28
-19
13
6
34
-8
12
20
35
20
28
-4
-18
-31
17
9
22
16
3
-41
23
4
-12
12
18
2
-11-15
-7-4
-11
-3
-10
-35
-6
-11
-24
-11
-18
-4
-16
-6 -5
-12
-31
-9-12
-35-37
-22
-8-6
-12 -12
-48
-26
-15
-25
-15-12 -12
-50
-40
-30
-20
-10
0
10
20
30
40
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Annual returns and intra-year declines
Source: FactSet, MSCI, J.P Morgan Asset Management. Returns are based on price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 1980 to 2014. Guide to the Markets - Europe. Data as of 30 June 2015.
MSCI Europe Index intra-year declines vs. calendar-year returnsDespite average intra-year drops of 15,6% (median 11,9%), annual returns are positive in 27 of 35 years
Intra-year decline
Calendar-year return
%
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45
-
46
28,9% EM Debt 11,9%
9,0% Euro HY
9,0%
3,7% Linkers
3,7%
19,6% US Treas.
13,7%
66,1% Euro HY 66,1%
23,1% US HY 15,1%
13,5% US Treas.
9,8%
23,3% Euro HY 23,3%
8,8% Euro HY
8,8%
22,4% US IG 7,5%
11,3% US HY 2,5%
-0,9% Euro HY -0,9%
9,0% EM Debt
7,7%
18,5% US Treas.
2,8%
0,5% Euro IG 0,5%
1,7% Euro Gov
1,4%
9,1% Euro Gov
6,2%
53,2% US HY 58,1%
19,6% EM Debt 11,8%
12,9% EM Debt
9,2%
16,2% EM Debt 18,0%
2,8% US HY 7,4%
20,9% EM Debt
6,2%
9,7% EM Debt
1,0%
-1,4% Linkers -1,4%
8,9% US HY 7,6%
18,4% US HY 2,8%
-0,0% Euro Gov
-0,0%
0,0% Euro IG 0,0%
5,3% Linkers
5,3%
22,0% EM Debt 25,9%
16,6% US IG 9,0%
11,8% US IG 8,1%
13,8% US HY 15,5%
2,4% Euro IG 2,4%
19,6% US Treas.
5,1%
8,6% US Treas.
0,0%
-2,9% Euro IG -2,9%
7,4% Euro HY
7,4%
17,2% US IG 1,7%
-0,5% Linkers -0,5%
-1,6% Euro HY -1,6%
0,3% Portfolio
-3,0%
16,4% Portfolio
18,9%
14,3% Euro HY 14,3%
7,9% US HY 4,4%
13,6% Euro IG 13,6%
2,1% Euro Gov
2,2%
16,7% US HY 2,5%
7,6% US IG -0,9%
-3,7% US HY -0,0%
6,8% US IG 5,5%
13,6% Portfolio
4,8%
-0,9% US HY 10,7%
-1,7% US Treas.
9,0%
-0,0% US IG -4,9%
15,7% Euro IG 15,7%
13,2% US Treas.
5,9%
7,4% Portfolio
5,4%
10,6% Portfolio
11,6%
-2,7% Portfolio
-0,3%
14,9% Portfolio
6,6%
4,8% Portfolio
0,1%
-4,3% Portfolio
-2,2%
6,6% Portfolio
5,5%
6,8% Euro HY
6,8%
-1,2% EM Debt 10,5%
-1,8% Portfolio
3,8%
-3,8% Euro IG -3,8%
15,0% US IG 18,7%
11,4% Portfolio
7,3%
3,5% Euro Gov
3,2%
10,5% Euro Gov
11,2%
-3,0% Linkers -3,0%
12,4% Euro Gov
11,1%
2,3% Euro HY
2,3%
-4,5% EM Debt
-0,9%
5,6% US Treas.
4,4%
4,8% Euro Gov
4,8%
-2,0% Portfolio
4,2%
-4,0% EM Debt
6,5%
-5,0% EM Debt
-9,7%
7,0% Linkers
7,0%
4,7% Euro IG 4,7%
1,5% Euro IG 1,5%
8,4% Linkers
8,4%
-5,8% US IG -1,5%
8,4% Euro IG 8,4%
0,8% Linkers
0,8%
-5,0% Euro Gov
-4,3%
5,0% Euro Gov
4,9%
4,0% Euro IG 4,0%
-6,7% US IG 4,3%
-5,7% US IG 4,6%
-22,3% US HY -26,1%
4,5% Euro Gov
6,9%
2,1% Linkers
2,1%
1,3% Linkers
1,3%
8,1% US IG 9,8%
-7,0% US Treas.
-2,7%
5,5% Euro HY
5,5%
-1,3% Euro Gov
-1,2%
-5,1% US Treas.
-1,6%
4,5% Euro IG 4,5%
3,7% Linkers
3,7%
-7,8% US Treas.
3,1%
-7,5% US HY 2,6%
-32,8% Euro HY -32,8%
-6,6% US Treas.
-3,6%
1,5% Euro Gov
2,2%
-1,1% Euro HY -1,1%
0,4% US Treas.
2,0%
-12,3% EM Debt
-8,3%
2,2% Linkers
2,2%
-1,6% Euro IG -1,6%
-6,7% US IG -3,2%
3,0% Linkers
3,0%
Fixed income sector returns
Source: Barclays Capital, BofA/Merrill Lynch, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers period 2005 to 2014. Euro Gov.: Barclays Euro Agg. Government; US Treasuries: Barclays US Agg. Gov. Treasury; Linkers: Barclays Euro Gov. Inflation-Linked; US IG: Barclays US Agg. Corporate Investment Grade; Euro IG: Barclays Euro Agg. Credit Corporate; US HY: BofA/Merrill Lynch US High Yield Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial High Yield Constrained; EM Debt: J.P. Morgan EMBI+. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 20% Euro Gov.; 15% US Treasuries; 10% Linkers; 15% US IG; 10% Euro IG; 10% US HY; 5% Euro HY; 15% EM Debt. Returns are unhedged in euro and local currencies. Guide to the Markets - Europe. Data as of 30 June 2015.
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20102005 20072006 20122008 2011 2Q152009 2013 2014 YTDTen-yrAnn.
GTM Europe | 46
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47
Fixed income market data
Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown are represented by the following indices: Europe Treasuries: Barclays Pan-European Aggregate Treasuries indices; US Treasuries: Barclays US Treasury indices; MBS: Barclays US Aggregate Securitized-MBS; IG Credit: Barclays Global Aggregate-Corporates; High yield: Barclays Global High Yield; Floating rate: Barclays US Floating Rate Notes; Convertibles: Barclays Global Convertibles Composite; EMD USD sovereign: J.P. Morgan EMBIG; EMD USD Corporate: J.P. Morgan CEMBI; EMD LC sovereign: J.P. Morgan GBI-EM. Credit yields are yield to worst. *Return is in local currency of the index and unhedged. Guide to the Markets - Europe. Data as of 30 June 2015.
Yield Return* 10-year correlation
# of issues Mkt. value($ billions) Avg. maturity 30/06/2015 31/03/2015 2Q15 YTD10-year Bund
10-year Treasury
Europe Treasuries1-3 years 1.280 3.109 2,0 years 0,34% 0,22% 0,11% 1,83% 0,44 0,17
5-7 years 968 2.285 6,0 1,10 0,62 -1,91 0,96 0,83 0,58
10+ years 938 3.581 20,4 2,37 1,55 -9,42 0,83 0,83 0,67
US Treasuries
1-3 years 95 2.451 1,9 years 0,63% 0,56% 0,14% 0,68% 0,47 0,65
5-7 years 37 1.001 6,0 1,89 1,58 -1,10 1,01 0,74 0,96
10-20 years 13 119 13,0 2,50 2,11 -3,28 -0,70 0,79 1,00
Sector
MBS 387 5.040 7,1 years 2,78% 2,40% -0,74% 0,31% 0,64 0,80
IG credit 9.288 7.657 8,9 2,83 2,39 -1,55 -2,71 0,09 0,26 High yield 3.447 2.253 6,4 6,54 6,27 1,28 1,94 -0,28 -0,21Floating rate 520 364 2,0 0,74 0,70 0,18 0,42 -0,24 -0,20Convertibles 795 359 0,0 3,02 3,04 1,44 3,35 -0,46 -0,46EMD USD sovereign 490 687 11,3 5,79 5,56 -0,26 2,26 0,09 0,11 EMD USD corporate 1.199 299 7,8 5,22 5,20 1,32 3,70 0,05 0,05 EMD LC sovereign 264 1.570 4,9 6,79 6,34 0,19 2,44 -0,04 0,03
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48
GTM Europe |
-4
-3
-2
-1
0
1
2
3
4
5
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '150
20
40
60
80
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
%
Central bank policy
Source: (Both charts) Bank of England, Bank of Japan, ECB, US Federal Reserve, J.P. Morgan Economic Research, J.P. Morgan Asset Management. *Core consumer price index inflation is the benchmark core CPI for each country, except Japan which is CPI less food and consumer tax. Guide to the Markets - Europe.Data as of 30 June 2015.
Real rates
%
Central bank balance sheetsPolicy rate minus core inflation* % of nominal GDPCentral bank policy rates
Bank of Japan 0,10%Bank of England 0,50European Central Bank 0,05US Federal Reserve 0,25
JapanEurozoneUSUK
Projections
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49
GTM Europe |
0
1
2
3
4
5
6
7
8
Jun 13 Dec 13 Jun 14 Dec 14 Jun 15
Ireland
-0,4-0,20,00,20,40,60,81,0
'10 '11 '12 '13 '14
Source: (All charts) FactSet, Tullett Prebon, J.P. Morgan Asset Management. *Rolling six-month correlation of weekly change in yield. Guide to the Markets - Europe.Data as of 30 June 2015.
Government interest rates
Sovereign funding costs
Correlation between government bonds
10-year benchmark bond yield
Correlation* between US Treasury and German Bund yields
%
Yield (%) Change (bps)Country Current 2Q15 From Dec 2013Greece 14,98% 351bps 672bpsPortugal 2,94 127 -317US 2,35 43 -68Italy 2,30 107 -181Spain 2,27 106 -191UK 2,03 43 -99Ireland 1,62 98 -181France 1,19 72 -119Netherlands 1,04 78 -120Germany 0,77 61 -118Switzerland 0,10 16 -117
2 yr bonds
10 yr bonds
Portugal
Spain
USUK
FranceGermanyJapan
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Fixed income interest rate risk
Current and historical yields for selected indicesLast 10 years*
Illustration of the impact a 1% rise in local interest rates may have on selected indicesAssumes a parallel shift in the yield curve and spreads are maintained
Price returnTotal return
How to interpret this chart
AverageCurrent
Max
Min
%
%Fi
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Treasury: Europe
1-3 years 5-7 years 10+ years Investment-grade creditHigh yield
EMD USD sovereign
EMD USD corporate
EMD LC sovereign
Floatingrate
Treasury: Europe 1-3 years 5-7 years 10+ years
Investment-grade credit
Highyield
EMD USD sovereign
EMD USD corporate
EMD LC sovereign
Floatingrate
Source: (Both charts) Barclays, FactSet, J.P. Morgan Asset Management.
*Historical spread analysis is based on the last 10 years of data, with the exception of local currency emerging markets debt, which are based on six years of data, due to data availability.
Fixed income sectors shown are provided by Barclays Capital and are represented by: Treasury Europe: Barclays Pan-European Aggregate Government Treasury; Floating rate: Barclays US Floating Rate Notes (BBB); IG credit: Barclays Global Aggregate Corporates; High yield: Barclays Global High Yield; EMD sovereign USD: Barclays Emerging Markets Sovereigns; EMD corporate ($): Barclays Emerging Markets Corporates; EMD sovereign (LC): Barclays Emerging Market Local Currency Government. For illustrative purposes only.Change in bond price is calculated using both duration and convexity. Guide to the Markets -Europe. Data as of 30 June 2015.
GTM Europe | 50
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5
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25
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GTM Europe |
152
98 89
59 48
2926
17
0
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400
500
600
700
800
900
0
2.000
4.000
6.000
8.000
10.000
12.000
0
100
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400
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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Liquidity and duration risks
Source: (Left) Barclays, Federal Reserve Bank of New York, J.P. Morgan Asset Management. (Right) Barclays, FactSet, J.P. Morgan Asset Management. *US corporate debt outstanding is the Barclays US Corporate Investment Grade. Interest rate risks chart assumes that all investments are issued at par and are made on 30 June 2015, with no reinvestment of income and with no consideration to convexity characteristics. Fixed income sectors shown are provided by Barclays Capital and are represented by Barclays Global High Yield, Barclays Emerging Market Local Currency Government, Barclays Emerging Markets USD Aggregate, Barclays Global Credit Corporate, Barclays US Aggregate Credit Corporate Investment Grade, Barclays US Aggregate Government Treasury (7-10 Y), Barclays UK Gilt (7-10 Y), Barclays Euro Aggregate Government Treasury (7-10 Y). Guide to the Markets - Europe. Data as of 30 June 2015.
US corporate debt market liquidity Mark to market: Interest rate risks$ billions Estimated amount of yield increase to wipe out next years income
bps
A 89 bps increase in yield wipes out income earned for the next year
Current yield$ $US corporate debt outstanding*Dealer inventories
Global HY
EMD Sovereign
EMDUSD
Global IG US IG US Treasuries
UK Gilts Euro Aggregate
Govt
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0
10
20
30
40
50
Source: (Top and bottom left) FactSet, Tullett Prebon, J.P. Morgan Asset Management. (Bottom right) BofA/Merrill Lynch, Bloomberg, J.P. Morgan Asset Management. *The lowest yield reached for each country during April 2015. Guide to the Markets - Europe. Data as of 30 June 2015.
Government bonds
10-year bond yields
'79 '84 '89 '94 '99 '04 '09 '140
4
8
12
16%
BoJ QE2013
Fed QE32012
Fed QE22010
BoE QE2009
Fed QE2008
Oil shock1981
Black Friday1987
Britain leaves ERM
1992
Asian currency crisis1997
9/11 attacks2001
Dot com bubbleFeb 2000
ECB QE2015
Fall of Berlin Wall 1989
Euro area government bonds with a negative yieldBofA/ML euro area bond index
%
European government bonds by maturity2 3 4 5 6 7 8 9 10 15 20 300
Positive yieldsNegative yields Negative in April 2015 and now positive*
Euro area bonds with
-
53
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'10 '11 '12 '13 '14 '15
-250
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250
500
750
'08 '09 '10 '11 '12 '13 '14 '15'06 '07 '08 '09 '10 '11 '12 '13 '140
100
200
300
400
500
600
European corporate issuanceCorporate bond spreads by currency
US corporate issuanceUS corporate bond spreads by sector
Investment-grade bonds
Source: (Top and bottom left) Barclays, FactSet, J.P. Morgan Asset Management. (Top and bottom right) J.P. Morgan Securities, J.P. Morgan Asset Management. *Option-adjusted spread is the spread of a fixed income security rate over the risk-free rate, adjusted to take into account any embedded options. Guide to the Markets - Europe. Data as of 30 June 2015.
Option-adjusted spreads*
Option-adjusted spreads*
bpsUSEurozone
UK
bps
Financials
EnergyIndustrials ex-energy
Utilities
Net issuanceGross issuance
Net issuanceGross issuance
$
billions
$ billions
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600
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1.000
1.200
'10 '11 '12 '13 '14 '15
YTD:255bn
YTD:658bn
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54
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500
1.000
1.500
2.000
0
5
10
15
20
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
0
100
200
300
400
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '150
10
20
30
40
50
60
70
'82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15
High yield issuanceUS historical high yield recovery ratesHigh yield bonds, cents on the dollar
Source: (Top) Credit Suisse, J.P. Morgan Economic Research, US Treasury, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below 50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. Leveraged loan spread is the discount margin to maturity. (Bottom left and right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. *General issuance includes issuance for the purpose of paying dividends. Guide to the Markets - Europe. Data as of 30 June 2015.
US high yield bonds
US high yield spreads and defaults
$ billions
% bps
Average: 41,5 cents General*
Acquisition/LBO
Refinancing$
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Asset class Average since 1986 Latest
HY defaults (lhs) 4,0% 1,9%HY spread bps (rhs) 576 549Lev. loan spread bps (rhs) 439 508
54
YTD:$185,4bn
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'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
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'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '150
500
1.000
1.500
2.000
2.500
US HY Euro HY
High yield sector weightsEuropean high yield issuance by credit rating billions
Source: (Top) BofA/Merrill Lynch, Credit Suisse, FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) Barclays, FactSet, J.P. Morgan Asset Management. Spread to worst is BofA/Merrill Lynch Euro Non-Financial High Yield Constrained. US HY is the J.P. Morgan Domestic HY index and Euro HY is the J.P. Morgan Euro HY index. Guide to the Markets - Europe. Data as of 30 June 2015.
European high yield bonds
European high yield: Spread to worst and default rates
% of index
Default rate 2002: 34%%
bps
B